Ringley’s top 10 property management tips:
Most leases require a leaseholder to obtain consent before making any alterations to a property. It’s a simple process also known as Licence to Alter.
Don’t assume timber walls are non-structural, once Ringley had to prop up floors in a 1980’s timber framed building after a leaseholder removed the wall between the kitchen and living room one sunday afternoon.
Is it an alteration?
If the answer is yes to any of the following questions, then a Licence to Alter will be required:
- Will your proposed alterations affect any face of the building (changing a window/door, putting a skylight in etc.)?
- Will your proposed alterations cut through any wall?
- Will your proposed alterations remove any part of any wall (internal, external or partition wall)?
- Will your proposed alterations increase the amount of waste water/sewerage leaving the flat? (E.g. new kitchen, bathroom, toilet, show etc.)
- Will your proposed alterations involve any modification to a communal service? (E.g. removing a radiator attached to a communal heating system, re-routing a communal waste pipe.)
Most leases have a covenant requiring the lessee to register sub-lettings or seek landlord’s consent to rent out their property. The costs of complying with the sub-letting clause and registering tenancies is an administration charge under Schedule 11 of the 2002 Act.
3. Consultation & recovery of money towards big works
Since 1985 the law says the landlord has to consult service charge payers where ‘qualifying works’ exceed £250. And, if they don’t, recovery is limited to £250 per payee.
The Daejan case in 2013 gave some relief as it widened the scope for a landlord to claim a retrospective dispensation where a consultation process was absent or flawed.
4. Forfeiture, leaseholders are protected, until a breach is established
Forfeiture is the name given to the process whereby a landlord seeks to bring a lease to an end and take back possession of a property, effectively dispossessing the lessee.
Since February 2004 a Freeholder can only take forfeiture action if the breach is confirmed by way of a Court or Tribunal judgement, for ground rent arrears, the arrears must be more than £350. This is why mortgage companies often will not pay up service charge arrears as their security is now safer than it used to be.
5. Demands, if the service charge demand is invalid, the money may not be due
It is not ok just to share bills informally as later a leaseholder could argue what they paid was not legally due. There are different advice notes, prescribed by law that must be sent with service charge, ground rent and administration charges demands. Without the relevant prescribed notes a demand is invalid.
6. Buying the freehold? Use an existing management company, (if you can)
If all owners want to buy the freehold, and you already have a management company written into your lease, you will save money if you use the existing management company.
Otherwise, you’ll end up doing: company accounts x 2, directors & Officers insurance x 2, annual returns x 2, company secretary x 2, filing accounts x 2
Using an existing management company means you won’t need to levy members contributions on the freehold shareholders to fund the cost of running the freehold company. If 100% of owners participate you can also elect not to collect ground rent.
7. Don’t put up with a defective lease
The most common lease omissions or defects are:
- can’t budget and collect service charges in advance,
- can’t recover the cost of a managing agents fees,
- the lease requires audited accounts which is cost prohibitive for small blocks
- you cannot insure the building as 1 block, i.e., each flat has to get their own buildings insurance,
- despite being required by law to produce service charge accounts (applies to 5 or more flats) you can’t recover the accountant’s cost,
- the lease is silent on who owns and decorates the windows,
- the lease requires the leaseholder to decorate the windows (5 stories up),
- no deterrent to late payment, i.e., you cannot charge interest on arrears,
- lease percentages don’t add up to 100%,
- maintenance of physical plant on site is not described as recoverable service charge, i.e., lift maintenance or expenditure,
- a schedule is omitted from the lease, i.e., parties that should contribute, are not required to.
Section 37 of the 1987 Act is quite a simple procedure whereby the Tribunal can vary a defective lease, and you don’t need 100% agreement. You will need
- 9+ flats – you need 75% agreement and not more than 10% to blocking it,
- 8 or less flats – you need the agreement of 7 flats.
Applications can usually be considered by written track (no hearing) so are not too costly.
11 leaseholders now save circa £1,654 a year every year since Ringley did a Section 37 lease variation.
>>read audit clause case study
4 leaseholders whose lease required an ‘audit’ of the service charge accounts costing circa £2,500+ us service charge accounts at £350+ now we save £2150 per year following a Section 37 lease variation
>>read audit clause case study
8. Consider the terms of a lease extension and how to distribute the cash
Since 1993 thousands of leaseholders have exercised their legal right to a lease extension. A statutory lease extension under Section 42 gets you:
- an additional 90 years,
- the ground rent reduced to a peppercorn (effectively nil).
After a freehold purchase the shareholders will need to decide the strategy for the future lease extensions. i.e:
- to sell statutory lease extensions
- to sell lease extensions + a share in the freehold company
- to sell top up lease extensions (top up to 99 or 125 years) with a modern ground rent for a slightly lower premium
Selling a share in the freehold company, should attract a premium over and above the lease extension cast. How to split the proceeds of future lease extensions i.e; only to the original freehold purchase participants.
If the lessee does not need an additional 90 years, by agreeing a modern ground rent you could sell an extension for a little less and keep the value of the freehold title higher and have less friends to share the proceeds of future lease extensions with.
To find out more about lease extensions >>step by step guide to lease extensions
9. Consider when granting consent for alterations if a premium should be charged
For alterations to a kitchen or bathroom, or remodelling walls it is not normal, and probably not reasonable, to seek a premium for granting consent. In fact many leases require that such consent is not to be unreasonably withheld.
However, when alterations increase the size of a property, change the use or change the external aesthetic appearance, when granting consent you should consider sharing the added value the consent brings by charging a premium, or a share of what is called ‘marriage value’.
‘Marriage value’ exists when interests or assets are combined to create a new interest or asset that which has a higher value than the sum of the each individually.
Marriage value is also created when the use of a property or demise is enhanced by consenting to a different use, examples include:
- conversion of a live work unit or office to residential dwelling status,
- turning an attic into an extra bedroom,
- creating a roof terrace on a roof,
- changing a window to the door giving direct garden access,
- creating a swimming pool in a garden,
- fencing off a part of the communal garden,
in these situations the consent will enhance the value of the leaseholder’s interest and a Chartered Valuation Surveyor should be employed to assess the premium that should be paid.
10. Fed up with legal paperwork? Simplify, simplify, simplify!
Corporation tax self assessment – write to your local tax office seeking an exemption from corporation tax returns, they will usually grant a 3 year exemption.
Full trading company accounts – stop trading if you can thereby reducing the cost of accounts and detail of what you need to file. If you have traded in the past, e.g., bought the freehold, then if you qualify as dormant you can reduce to abbreviated accounts. If your company does not have any assets and has not traded during the accounting year, you can file dormant company accounts, essentially just a balance sheet.
To become dormant you will need to
- Stop receiving income (pass a resolution to stop collecting ground rent),
- Hold money outside the company, ie, in an Agent’s Client account so you do not have a trading bank account,
- Not have bought or sold any assets during the year.
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